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Posted by
Mr. Smith
on 2008-11-03

Traction is the buzzword of fundraising these days. It is required by many, and understood by few. Here is an attempt at defining traction for all parties in the fundraising cycle.

1. The Idea: How strong is the fundamental idea and underlying revenue model" Does it make complete sense, and is it backed up by published industry data"

2. The Team: Have you assembled a group of domain experts that can execute the idea and the model" How seasoned are the experts that you have assembled"

3. The Prototype: Do you have a prototype of your offering that is compelling to the target audience" How polished is the prototype"

4. The Launch: What is the reaction among trade journals and other media outlets regarding your product launch" Is it well covered and well regarded"

5. The Adoption: How many target customers have adopted your offering and is the growth rate substantial" Are you experiencing a high level of customer satisfaction or a concerning level of churn"

6: The Revenue: Have you started to derive revenue from your offering and is that revenue either ahead or behind or model assumptions" What variables have changed from your assumptions"

7. The Profitability: How profitable or near profitable is your model once in operation, and are there untapped revenue opportunities for future revenue growth"

8. The IPO: How long until you can take your company public, assuming two years of fast growth, audited financials, and profitability or near profitability"

Most venture capitalists, for better or for worse, tend to invest in phases 4 and 5. VCs like the potential upside without the too much details from phase 6, though many investments occur at the start of phase 6, before any details can be conclusively determined. Any other thoughts"

So, in my experience, there are seven levels of "traction," and each level has various nuances. For example, "the launch" could be a soft launch or a beta launch. "The idea" may be rough, modeled, patented, etc.

At each level of traction, quality of the execution is measured by investors. So, a great idea with a great team may secure a similar sized funding as a mediocre idea with strong adoption.

In the 2010 market, most semi-professional investors, such as organized angels, require a prototype for serious consideration, and most venture capitalists require initial success with adoption. There are exceptions, though rare, and you can overcome the need to hit traction thresholds by dominating in the present. Amazing adoption eliminates the need for revenue (Twitter, FaceBook, YouTube). A great team overrides the need for a prototype, etc.